Recession’s Dampening Impact on Trade Likely to Linger

Trade severely affected by global economic crisis

Many advanced economies’ imports set to stay below pre-crisis trends for years

Crisis-hit economies should adopt reforms supporting output, trade recovery

Because the crisis occurred in economies that account for almost half of global demand, the speed and extent of the recovery in their imports will have a significant impact on growth in their trading partners, the analysis in the IMF’s latest World Economic Outlook (WEO) says.

The WEO chapter, which looks at the impact of financial crises on imports and exports over the past 40 years, finds that imports tend to decline sharply in the first two years after a financial crisis and remain depressed even in the medium term. In contrast, exports are relatively unaffected.

IMF economists wanted to analyze trade dynamics following past banking and debt crises to help understand how trade might evolve in the wake of the recent financial crisis. They looked at 169 episodes of banking and debt crises in advanced, emerging, and developing economies. The authors tracked the behavior of imports and exports after these crises, both to estimate the overall trade declines and to assess the effects of various factors—such as output, credit conditions, and exchange rate dynamics—on trade.

Imports likely to remain down

They found that imports fall sharply after a financial crisis and remain below normal (that is, below their predicted level) even over the medium term, while exports are relatively unaffected.

A number of factors explain the decline in imports. The decline in output accounts for roughly half of the post-crisis fall in imports. In the early years of the post-crisis period, increased exchange rate volatility and currency depreciation are associated with the import fall. Over the medium term, poor credit conditions are...